Tuesday, January 15, 2013

BID ADIEU TO THESE 10 WMDS!

This article was featured as a part of the Tuck-IIPM-B&E Joint Study cover story on 'The Worst CEOs of 2012' that appeared in the January 2013 issue of Business & Economy magazine

The only thing that can perhaps be worse than hiring the wrong employee is hiring the wrong leader. In this incisive analysis, PROF. ARINDAM CHAUDHURI, HONORARY DIRECTOR, IIPM THINK TANK and PROF. A. SANDEEP, GROUP EDITORIAL DIRECTOR, PLANMAN MEDIA, identify 10 CEO traits that are an agglomeration of bad news for the companies that they lead.

It’s the position that makes the most bucks. But then, it is also the position where the buck stops rolling. The CEO is answerable to every stakeholder imaginable for the success or failure of any operation/division; be it marketing, HR, operations or finance. He takes decisions, sets the direction and sets the organisation up to execute on his strategy; and can be the critical difference between a company that ups the ante and one that falls of the cliff.

The traits that define a good CEO have been the subject of scrutiny and debate over several years, but it remains largely unresolved. That’s certainly bad news for corporate boards, who would want to go to any extent to ensure that they have the right man. Based on exhaustive research and industry interface over the years, we present an expansive primer of 10 typical traits of unsuccessful CEOs, which should act as red flags for any company.

#1 THE BEST ONE-TRICK PONY YOU MET

To be true, multi-tasking is a way of life today, but one really wonders if it is the trait that should be associated with CEOs. If you look at expert analysis, CEOs looking to specialise in one area, with the belief that it leads to better efficiency and performance, need a very urgent reality check. Dr. Louis Csoka published a benchmark report titled ‘International Communications Research in December 2006, which proved that multi-taskers were not only more educated in comparison (78% more) but were also better paid (200% more!). It is also affirmed in a research by Dr. Levenson (University of Southern California), Dr. Gibbs (Chicago Graduate School of Business) and Professor Zoghi (Bureau of Labour Statistics) titled, ‘Why Are Jobs Designed The Way They Are?’, that in world leading organisations, ‘multi-tasking’ “leads to greater productivity” as compared to specialisation. One case in point is highlighted in the NHS Report from Institute for Innovation and Improvement, which wrote of Microsoft founder Bill Gates, “Gates is the original multi-tasking man...” In fact, Gates’ belief in multi-tasking is so supreme that “once, Gates hung a map of Africa in his garage, so he could have something to occupy his mind for the precious seconds spent turning on the engine of his Porsche.” In other words, there is a significantly high probability that single/limited tasking CEOs would easily find their way into the ignominious list of worst performing CEOs.

#2 LET’S BE HISTORY TOGETHER!

Does your organisation revolve heavily around one power figure, with his immediate deputies leading the rest in following his cue blindly on every occasion? If that be the case, you must delink from this organisation at the earliest opportunity. The right CEO is one who identifies potential insiders and grooms them relentlessly into leadership positions, and keeps a list of potential successors ready. The wrong CEO, simply put, is one who does not do that. Global HR consultancy Heidrick & Struggles reveals an interesting research finding, which states that “merely announcing who your next CEO will be, can move the market value of your company by 5% or more!” Centre for Economics & Business Research also proved in its benchmark research of 350 FTSE firms in 2005 that firms with unplanned succession planning for CEOs underperformed their counterparts, who had proper succession planning in place.

Sir Li-ka Shing, Chairman, Hutchison Whampoa has built a
multi-billion dollar empire that’s over $90 billion in mcap.
Interestingly, he started off as a watch salesman at the age of 14

Additionally, though it is bad news for head hunters, the best candidate to succeed you is most likely within your organisation. Hay Group has concluded from a 2007 research that around 80% of Fortune Most Admired Companies prefer internal candidates. Even Booz Allen concluded in 2008 that 80-83% of new CEO hires are normally insiders. In another study titled Crest of the wave, they found, after processing data from 2500 of the world’s largest firms that almost 30% of firms that showed negative performance outcomes roped in external CEOs, but the figure was only 6% for positively performing ones.

#3 THE MORE THE ZEROS...

Just like more risk is assumed to be better, one is tempted to believe that CEOs who demand higher pay packets are greater achievers. But both premises are structurally faulted. Profs. Michael Jensen (HBS) & K. Murphy (University of Rochester) analysed the paychecks of 2,505 CEOs of 1400 companies over a span of 15 years and concluded, “The compensation of top executives is virtually independent of performance.” In fact, one can even observe a negative correlation between CEO entry and exit packages and corporate destinies. The revealing Forbes report on CEO compensation acknowledges that the top 100 earning CEOs over a five year period were nowhere in the top 10 ranks on the efficiency index. In fact, the top 10 on efficiency didn’t even make it to the top 130 in terms of compensation! A Booz Allen Hamilton report titled, “Reining in the Overpaid (and Underperforming) Chief Executive” quotes corporate governance expert Nell Minnow, who is severely critical of the CEO compensation approach adopted by boards of Citigroup, Merrill Lynch, et al, thus, “These CEOs were guaranteed outsized exit and separation packages, regardless of how their firms performed. All CEOs who failed got paid very well.” The Corporate Library published a report, “Pay for Failure: The Compensation Committees Responsible”, in May that revealed that eleven publicly listed companies – AT&T, BellSouth, HP, Home Depot, Lucent, Merck, Pfizer, Safeway, Time Warner, Verizon and Walmart – gave a total compensation of $865 million to their shareholders between 2001 and 2006. And these CEOs led a total shareholder wealth erosion of $640 billion during the same period.

#4 THE CEO NOBODY KNOWS ABOUT

We instantly associate Henry Ford with Ford Motors, Bill Gates with Microsoft, Steve Jobs with Apple, Mark Zuckerberg with Facebook and Michael Dell with Dell Computers (and vice versa). CEOs who can’t be the ‘face’ their company needs to project to the outside world must bail out at the earliest. Prof. Nicholas O. Rule and Prof. Nalini Ambady of Tufts University did a benchmark analysis of the top 25 and bottom 25 companies on the Fortune 1000 list. They concluded, “Participants’ naive perceptions of leadership ability from CEOs’ faces are significantly related to how much profit those CEOs’ companies make... CEOs from more versus less successful companies could be distinguished via naive judgments based solely on perceptions of the CEOs’ facial appearance.” You know so many American CEOs by face and name, but few can recall any Japanese CEOs apart from, perhaps, Akio Toyoda. Is that why the Japanese economy refuses to revive even after so many years? In other words, CEOs who refuse to become the positive face of their companies might ensure that investors’ perceptions of their companies are negative, thus reducing stockholders’ wealth significantly.

#5 CORNER OFFICE OR IMPERMEABLE SHELL?

CEOs who fail to consistently communicate with their employees will soon find themselves leading a team of headless chickens guided by myriad unofficial grapevines and sans direction. Boston Consulting Group reiterates in its report Creating People Advantage In Times Of Crisis that clear communication is the key trait of outstanding leaders when the times are bad. In a May 2009 research publication titled “Formal and Real Authority in Organizations: An Empirical Assessment”, Feng Li, Venky Nagar & Michael Minnis (University of Michigan) and Madhav Rajan (Stanford) concluded that CEOs who communicate more consistently had more of “real authority”. Charles Coffin, ex-CEO, General Electric, was ranked #1 by Fortune in its list of “10 Greatest CEOs of all times”. He consistently communicated with sub-par employees with overwhelming success. Jim Collins wrote that Coffin “created a system of genius that did not depend on him – he created the idea of systematic management development.” Even Steve Jobs believed that marathon meetings with employees were a must for superlative performance, sans exceptions.

Alan Mulally, President & CEO, Ford Motors: Mulally has been unabashedly autocratic with Ford’s employees, but he has also been exceptionally successful

Professors Raffaella Sadun (Harvard Business School), Luigi Guiso (European University Institute), and Oriana Bandiera & Andrea Prat (London School of Economics) studied the daily time tables of 94 top European CEOs and concluded, “The vast majority of a CEO’s time, some 85%, was spent working with other people through meetings… while only 15% was spent working alone.” That, in itself, should rule out a leader who spends most of his time leading himself.

#6 WHO NEEDS A B-SCHOOL?

Do MBAs necessarily make better CEOs? There are numerous arguments to the contrary, but they couldn’t be further from the truth. Spencer Stuart’s Route To The Top survey, 2008, affirms that an overwhelming 62% of S&P 500 CEOs have a minimum of one advanced degree (MBA, Master’s, Doctorate etc). At the Bachelor’s level, BBA was the second most common qualification for S&P 500 CEOs after engineering. Dr. Stephen Long, who is a popular leadership coach to Fortune 500 companies and NFL teams, joins many industry leading voices in favour of MBA education for CEOs when he asserts, “Management education teaches CEOs the ultimate there is in managing a company and managing employees. It is not important. It is necessary.” Jack Welch, one of the most outstanding shareholder wealth creators in corporate history, steadfastly supports hiring MBAs, even though he isn’t an MBA himself! In other words, choose MBA CEOs over non-MBA CEOs – a non-MBA CEO could end up not creating as much shareholders’ wealth as an MBA CEO. In the path-breaking research titled Managing With Style, MIT Professors Marianne Bertrand and Antoinette Schoar – after undertaking a most massive research over 7,500 of the world’s leading corporations – proved most conclusively how companies with MBA CEOs perform better than those having non-MBA CEOs. The report statistically shows how “the most interesting finding is the positive relationship between MBA graduation and corporate performance.”

#7 THE SOFT ‘READY WHEN YOU ARE’ CEO

Nobody loves authoritarian leaders who invite comparisons with Hitler and the Third Reich. But the cookie crumbles differently now, and you should be hating the gentle, indecisive ones instead! Harvard Business School, in its report titled “Harley’s Leadership U-turn”, deliberated on the authoritarian tendencies of Harley Davidson CEO Rich Teerlink, who rescued the company from near extinction. It surmises that in critical situations, authoritarian leaders are the right choice.

(Left) Lakshmi Mittal, Chairman & CEO, ArcelorMittal and (Right) Late Steve Jobs, ex-CEO, Apple: Their grand visions and passion for excellence have been the driving force that has propelled their respective companies to industry leadership

The same was reiterated by Dr. J. Howard Baker of University of Louisiana, who said that authoritarian leadership was a must for “stopping something, destroying something, or conquering something...” in his paper, “Is Servant Leadership Part of Your Worldview?” The commanding natures of Jack Welch (GE), Alan Mullaly (Ford Motors), Lou Gertsner (IBM) and Steve Jobs (Apple), were a key aspect of their success.

Combined with this is the issue of narcissism. Everyone would love a CEO who cares for other’s opinions and engages in participative decision making. However, if research has to be considered, investors shouldn’t touch companies that are led by such CEOs with a barge pole! A 2004 report released by Harvard Business Review titled, ‘Narcissistic Leaders – The Incredible Pros...,’ states, “Many leaders dominating business today have what psychoanalysts call a narcissistic personality. That’s good news for companies that need passion and daring to break new ground.”

The report highlights that if narcissistic CEOs like Jack Welch and George Soros are at the helm, organisations can look forward to transformative changes led by “compelling, even gripping visions...” On the other hand, CEOs who are overtly participative and opinion seeking will fail at bringing in such changes, especially when organisations need them most. Prof. Chatterjee and Prof. Hambrick of Penn University also asserted in a May 2006 study titled ‘Narcissistic CEOs...’, that narcissism in CEOs “is significantly positively related to several (desirable) company outcomes, including strategy dynamism.

#8 THE GUT FEEL CEO OR THE DATA DRIVEN CEO?

How true is the adage “Nothing ventured, nothing gained” in the real world? Indeed, a number of successful CEOs take important business decisions from ‘gut feel’ rather than relying on actual data and future projections. And they are not necessarily wrong. Prof. William Duggan, Senior Lecturer, Business & Management, Columbia Business School, writes, “Analysis & creativity work together in the whole brain to give you a creative idea that makes analytical sense in a flash of insight. This is what we call intuition - gut feeling.” Professor Smith (Surrey) and Erella Shely (Academy of Management Executive) have concluded from their research that executives view intuitive decisions as actually being “expertise that has been built up... and influences conscious thought and behaviour.”

Moreover, accuracy of data is always debatable. The PwC Global Data Management Survey 2004 illustrates that companies are increasingly tentative for their own data and even more skeptical when they get data from external sources. But this does not mean that higher risks necessarily mean higher returns. Professor T. J. Kamalanabhan (Universiti Telekom, Malaysia) and Dr. D. L. Sunder (IIT Madras) affirm in their 1999 paper, ‘Managerial Risk Taking: An Empirical Study’, “Considering that managers are aware of their organisations’ resource constraints, moderate risk taking is eminently rational.” CEOs interviewed in a 2005 global survey conducted by KPMG titled, ‘Risk Taker, Profit Maker?’ admitted that ‘Poor Forecasting’ and ‘Poor Risk Identification’ were the leading culprits behind falling margins. So both extremes – CEOs relying too much on gut feel and CEOs waiting too long to have data in their favour – are bad bets for organisational leadership.

#9 THE CEO WHO NEEDS TO SEE THE OPHTHALMOLOGIST

Not having a vision is bad enough, but having one that is vague and utopian is worse. Further still, a failure to clearly articulate the vision to the organisation’s employees means that your current CEO turned into a debilitating liability yesterday. Vision is the power that can propel people like Sir Li Ka-shing, who started his career at the age of 14 as a watch salesman, to towering heights. He is the richest man in Hong Kong today (net worth of $27.5 billion as per Bloomberg Billionaires Index, 2012), who oversees an empire that’s over $90 billion in mcap.

Iconic management guru Jim Collins has concluded from his world class research (from his bestseller Built to Last) that the stock returns accrued from visionary companies were 700% more than their not-so-visionary counterparts. The Ken Blanchard group surveyed over 2000 respondents between 2003 and 2006 and found that the worst mistake ever for a CEO was the inability to communicate a vision in a “meaningful way”.

#10 PASSION, PASSION, PASSION!

What worth is a CEO who hates to part with the status quo and keeps most modest and achievable goals for his organisation? Well worth a replacement, we would say! The right CEO has to be immodestly entrepreneurial and ready to keep pushing the envelope intelligently. Peter Drucker asserted that no organisation can stay ahead on the innovation curve, unless it is filled with die-hard entrepreneurs who find the prospect of creation too good to resist. And passion is the key trait that distinguishes an entrepreneur/intrapreneur from the conventional manager. Renowned research firm Harrison Group has proved in a research paper (published in a Microsoft research release in May 2007 titled ‘The Rich Have Money – And Passion’) that around 70% of America’s big family fortunes were created less than 13 years ago (which means they are not inherited) and “the people who amassed those fortunes are primarily entrepreneurs – risk takers for whom wealth is a by product of pursuing their passion!” When Dr. Jonathan Byrnes from MIT took upon himself the task of highlighting the eight essential characteristics of transformational leaders, he put “capacity for passion” at the top, after a detailed international research. Renowned management guru Guy Kawasaki believes that true entrepreneurs can get the best people by just communicating their passion, rather than committing hefty pay packages. Passion has been one of the greatest strengths of the likes of Bill Gates, Michael Dell, Larry Ellison & Jack Welch.

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